Resolution for 2018: Be Healthy & Wealthy

2018 is almost here and we already have a plethora of plans and resolutions that we wish to accomplish. Considering that the New Year is the most motivating time to start with some new decisions which can change our life for the better, one excellent way to do it is by making some solid resolutions which can help us to be healthy and wealthy the two most important part of life. We can learn the good habits for healthy life and use them for a financial wealthy life as well.  Let’s chalked down the good habits for a healthy life and how can we learn from them to also have a wealthy life.

1.  Get up early in the Morning: Start Investing Early in Life

One very significant benefit of waking up early is reduced stress level. When we rise early, it eliminates the need to rush in the morning. We can then start your day on an optimistic note and such positivity often stays with you throughout the day. Early risers often go to bed early.

Similarly starting the investments early allows us to develop disciplined spending habits by focusing on budget and cutting expenses when needed. It gives more time to grow our investments and we get the amazing benefits due to power of compounding. Let’s understand it by an example: Ram starts saving Rs. 5000/- monthly at the age of 25 will get approx. 2.76 crs. At the age of 60. While Shyam who starts saving Rs. 5000/- at the age of 35 will get only 94 lakhs when he reached 60.

2. Have Balanced Diet: Diversify the Assets

A well-balanced diet provides important vitamins, minerals, and nutrients to keep the body and mind strong and healthy. Eating well can also help ward off numerous diseases and health complications, as well as help maintain a healthy body weight, provide energy, allow better sleep, and improve brain function.

Similarly we should diversify our capital across different investments to reduce your overall investment risk. This strategy is designed to help reduce the volatility of investment portfolio over time. For example a single scheme of mutual fund invests in 20-30 stocks and provides the needed diversification in a single investment.

3. Exercise Regularly: Invest Regularly

Regular exercise helps us to Control Your Weight, reduce the Risk of Cardiovascular Disease and Type 2 Diabetes and Metabolic Syndrome.  It also helps in reducing certain type of Reduce Cancers as well as it Strengthen our Bones and Muscles. Exercise also improves our Mental Health and Mood.

Trying to pick the top or bottom of markets is notoriously difficult, by making regular investments we can avoid timing the market. Regular investing helps to ensure that we don’t miss out on the best gains. Regular investments also helps to reduce the impact of periods of short-term volatility and gives our money the time it needs to grow, as markets will generally increase over the long term.

4. Drink enough Water: Have enough Liquidity

One of the best things we should do after waking up in the morning is to drink at least 500 ml of water. Water fires up our metabolism, hydrates and helps our body to flush out toxins. It gives our brain fuel, Improves Skin Complexion, Boosts Immune System and may even make us eat less.

Similarly we should have sufficient liquid assets. Liquid Assets are low-risk investment which can be converted to cash quickly and easily with little or no penalty. Examples of liquid assets are Treasury bills, savings accounts and money-market/liquid mutual funds. Flexibility and accessibility are just two of the ways liquid assets can help you stay ahead in the financial game. Liquidity is important. In case of emergency It is a safety net for us and our family.

5. Have Enough Sleep: Have enough Risk Cover

Adequate sleep is a key part of a healthy lifestyle, and can benefit our heart, weight, mind, and more. Sleep makes us feel better, but its importance goes way beyond just boosting mood or banishing under-eye circles. Sleep plays an important role in our physical health. For example, sleep is involved in healing and repair of our heart and blood vessels. Ongoing sleep deficiency is linked to an increased risk of heart disease, kidney disease, high blood pressure, diabetes, and stroke.

We should always have proper risk cover to face the uncertainties of life like health issues, loss of income, fire or theft at home etc. We should take proper Health insurance, life cover and also insure our valuable assets from the risks. By having proper risk cover we can have a much tension free life without bothering much for the uncertainties of life and can take also take some calculated risks in life.

6. Don’t diagnose yourself: Take Professional Help for analysing

In this day and age of limited time with doctors coupled with ample opportunity to google anything, the temptation for people to reach their own conclusions about their illness is strong. When we self-diagnose, we are essentially assuming that we know the subtleties that diagnosis constitutes. This can be very dangerous, as people who assume that they can surmise what is going on with themselves may miss the nuances of diagnosis. Another danger of self-diagnosis is that we may think that there is more wrong with us than there actually is. Then there is the fact that we can know and see ourselves, but sometimes, we need a mirror to see ourselves more clearly. The doctor is that mirror. To be fit and healthy we should always take Doctor’s guidance to know the exact problem and the right solution to cure it.

Similarly a Financial advisor examines an individual’s financial situation and health. He may pinpoint weak points that need strengthening. For example, the advisor may alert you about wasteful expenditure. He may identify investments that are not giving optimal returns. With the help of the advisor, we can chart out our financial goals–even the improbable and ambitious ones. The advisor can then help you create a plan to achieve these targets. He may suggest that you split your goals into short-term, medium-term, and long-term goals. This allows for better financial management. The advisor can recommend products to help you reach your goals faster. In this, the advisor would assess the risk profile, personality, and financial responsibilities. He would also explain the product features and suggest how to make the investments.

Managing your personal finances is not rocket science. People have been doing it for years with success. But it is all a matter of trial and experience. Choosing the right financial advisor is crucial to the success of any financial plan.

7. Periodic Reports & Regular visits to Doctor: Periodic review & regular interaction with advisor

Our health is our greatest treasure. Taking care of our health is utmost important. But in our daily life, we keep on looking for excuses to not visit our doctor. Be it for saving money or for other reasons like ‘I am too young and healthy to go to a doc’, ‘I don’t have time today; may be next week, I’ll get an appointment…”, we keep on ignoring our health. We ignore the fact that performing regular health check –ups from young age can actually reduce the risk of occurrence of several health issues in future.

Similarly we should have regular interaction with our financial advisor. Given the ever changing economic landscape, it is prudent to keep in touch with your financial advisor at least once in six months. This communication can take the form of a telephone call, an e-mail, text or meeting to discuss our current financial situation and any changes in our goals and needs. It is also important to have a face-to-face meeting at least once a year, or upon the event of any major significant changes in our or family’s life such as birth, marriage, divorce, death, inheritance, sale of house, purchase of house, change of job, loss of job, illness, pending retirement, or reaching Medicare age etc. Topics of discussion could include subjects such as tax situation, financial evaluation and estate planning, structure of portfolio, total assets, current and future growth or earnings, non-market related assets such as a private company or real estate.

7. Have qualified family Doctor: Have qualified & Certified Financial Planner

We should have a good doctor who is learned, honest, kind, humble, enthusiastic, optimistic, and efficient. He or she inspires total confidence in patients and develop a good relationship that by itself constitutes good treatment for any kind of ailment and the best starting point for confronting all causes of pain and suffering.

Similarly we should have a good and well qualified Financial Advisor who understand our requirements and also qualified to advise to client’s best interest in mind and can help in sorting out the income, expenses, needs, wants and financial ambitions as required for a person and his family.

If we follow these basic principles in life we may stay healthy & wealthy and live life peacefully.

Basic Rules of Personal Finance

For some people, getting personal finances in order is most difficult part of their life. However there are few basics and if we follow them properly it can make our financial life easy and systematically. Let’s discuss these basic commandments and understand their implications in our life.

1. Not just read but take Action

We keep on reading various articles about personal finance however just jeading about how to improve your personal finances will not work unless we take the action of putting what we learn into motion. Before we can get anywhere with our personal finances, we need to begin and the best time is-- right now. If we are reading this article, we know that we should be taking steps to get our personal finances in order.

First thing we should do is to take a print out of this list and place it where we can see it every day, so that it reminds us that personal finance is a priority in my life and that I shall take some action each and every day to try to improve it.

2. Credit Cards are costliest loan so clear it first

Credit card company’s charges interest rates between 3-4% monthly compounding which comes to 40-50% annualized. This is the costliest loan ever. In many cases people just pay the minimum due amount and that results into a debt trap. This is the number one enemy to our personal finances. It can have a huge negative effect if we don’t pay our credit card bills fully every single month. Make this a top priority.

3. Keep the Cashflow positive

It is simple math that our cash inflows should be higher than cash outflows. If we want to keep our personal finances in order, we should live on less money than we make. That means either our total expenses for goods and services we use should be less than our current income, or we should find out a way to increase our income so that we can spend more, but still less than what we make. Either of these is perfectly fine.

We should create a budget and track our expenses to see where we are spending and how it fares vis-a vis our income. If we are spending more than we make, we need to decide whether to curb unnecessary expenses or figure out how to increase the income.

4. Wants and Needs! They are different

We need to understand the difference between wants and needs yes they are different and must be differentiated to keep our personal finances in order. Yes we can spend some amount in small luxuries, however it should be in budget and after meeting the essentials.  It is very important to realize that wants are not needs. If we understand the difference and control our spending’s our finances will be in much better shape.

5. Pay Ourself First

Keeping specific amount for our future/emergency needs is a must. So before we start spending money on other expenses we should pay our self a minimum of 15-20% of take-home pay. This money is not part of monthly spending budget but saved for future goals/emergencies. A direct debit from bank account to liquid funds could be a good starting option for that.

6. Have Specified Financial Goals

We should have specified financial goals as per our requirements In order to reach them. Every person has their life style and priorities hence specific goals, so we should understand and decide our specific financial goals and when we want to achieve them. Based on these goals steps need to be taken to reach them.

7. Save and Invest

The money taken out (as mentioned in point no. 5 that you pay yourself) should be invested properly so as to make it grow and work for us in the future.

As mentioned in point no. 2 If we are carrying credit card debt, invest in (pay) it first. We should also make sure to take full advantage of various tax saving and investing opportunities that are available. Build retirement corpus and make sure to have an emergency fund.

8. Be Responsible for our Decisions

All of us cannot be expert on finance and investments and may feel it more convenient to hand over all our money matters to somebody else. However we should have the final say in all decisions about our money. We may seek out advice and get opinions on our finances, but in the end it is my money hence our responsibility. Remember we are the only one who is going to truly look after our own interests.

9. Protect the Assets

Life is uncertain and beyond our controls hence we should take all the necessary steps, usually through insurance, to make sure that our assets are protected in case of a disaster.

Take the time to check and ensure that all assets are properly insured, and re-evaluate this every few years or whenever a major life change occurs, such as marriage or a new addition to the family. Also be sure to compare insurance rates on a regular basis, since this is a competitive business.

10. Contribute to the Society

We may be not very rich but there are a lot of people that are far worse off than us in the world. It's important to nurture a sense of giving and to be thankful for the small things that we have. That means donating to worthy causes on a regular basis.

We can select a few causes that we believe in, and give to them generously. It’s not just money that we can give. Volunteering time and skills are also appreciated by most charitable organizations. 

Insurance: Are you covering Risk or just saving Tax?

Almost all of us have insurance policies, many of us have actually multiple policies, mostly sold by someone known to us. But do we really know whether we actually need them and how much risk cover we are having?

We should keep in mind that an insurance policy is supposed to protect one against a financial loss in the event of a casualty or untoward event. In the case of life insurance policies, such an event is the untimely death of an earning member of the family, resulting in loss of future income. The best way to buy protection against such financial loss is to buy an insurance policy for an earning member of the family such that the risk cover (or sum assured) is as high as possible for the lowest amount of premium payable.

Most of the policy holders do not know the amount of life insurance cover they have but they know exactly how much premium they pay each year and also insurance agents generally push more on investment based insurance products rather than pure risk cover products. Why is it so, let’s understand it?

1. According to the accounting principles followed by the Insurance Sector, the premium collected by an insurer is booked as its income, while the risk covered is the firm’s liability. A pure term plan is a policy that gives the least income to the insurance company, while creating the highest liability. Hence, it really does make good business sense for insurance companies to sell investment-linked insurance policies, to shore up their income. 

2. Since income is the main criterion, insurers fix sales agents target based on premium collected rather than total risk covered. This leads to the agents to sell those policies where higher premium can be collected.

3. The seller’s commission is linked to the premium and not the cover. Therefor pure insurance policies tend to lose out to investment-cum-insurance products in sales.

4. The Income tax deduction under section 80C is linked to the premium paid and not the risk cover. Therefore investors also focus more on the premium amount and how much they will save on tax rather than the risk cover.

5. The normal human psychology is to get something when we are paying for it. In pure term insurance policy a policy holder do not get anything if he survives over the tenure of the policy which makes it unattractive. But we should compare it with mediclaim or vehicle insurance where we don’t get anything if there is no claim.  In case of life insurance policy why we always want something. Read my earlier post Mutual Fund + Term Insurance: Best of both Worlds for to understand that how term insurance and mutual funds can give much higher returns as compared to traditional policies.

The most suitable policy for providing such protection is a pure term plan. Whenever a person tries to sell an insurance policy, we should ask for a comparison of features and costs across the various options available. The first step in buying insurance cover is to calculate one’s need. The next step is to find which insurance policy would serve the purpose.

As for tax planning, many options besides insurance are available. If we want to take risk, invest in an equity-linked savings scheme. If we do not want to take risks, there are longer-term bank fixed deposits, NSC, PPF, SSY etc.  which come under Section 80C. Certain expenses like: Children’s tuition fees, the principal repayment part of the home loan EMI, etc. are also eligible for Section 80C benefits:

We should always remember: As a life insurance buyer, our primary need is to get a risk cover. Focus on that. That will save us from mis-selling, too.

How can we save more in the same Income?

We all want to save more but we have limited resources, so how can we increase our savings in those resources only. In this post we will try to find out few simple tips which can be used to improve our overall savings.

1. Have a budget and follow it

We should have proper budget so that we can control the expenses within limits. Best way to do it is by fixing certain percentage of our income as saving and the remaining amount be spend or

Income - Savings = Expenses.

2. Nothing is free

We generally tend to spend more when using a credit or debit card, than when using cash. Similarly, we also treat a windfall income like a bonus and regular income like a salary differently. If we realise that the money spend by credit/ debit card will also go from our own income only and bonus is also hard-earned money, we may be more sensible while splurging this money.

One time cash flow can be invested through STP way which we have discussed in my last post (see the post How to invest large sum when market is at all time high?

3. Not Just Save but Keep on Increasing the Amount

It’s good to start saving but that is not enough. We should regularly increase the quantum of savings and investment. This can be done in line with the increase in income. In few cases like in EPF this increase happens automatically, as contributions to it is fixed as percentage of salary. However For other investment avenues, the onus of increasing contribution lies with the investor. By increasing the quantum of investments annually, we can reach to our goal faster or generate a bigger corpus.

As a thumb rule we should increase the amount by the rate of inflation. In mutual funds there are “Step-up SIPs  by which we can increase the SIP amount by certain amount or percentage  at a predefined time interval which can automatically increase our saving rate.

4. Saving is not enough, It should be invested properly

Once we have decided to save more and increase the quantum regularly, the next step is to route this savings into suitable investments. Few people are very good in saving but not good at investing. If we keep large amounts idling in savings accounts that generate 3.5% returns and in tax inefficient FDs then it is not a very sound investment strategy.

We need to overcome from loss aversion mentality, which occurs when the pain of losing money is greater than the happiness felt in gaining an equal amount. We need to understand that while keeping the money idle in bank accounts, assuming its safe we ignore the risk of inflation which ends up earning with 3.5% returns, actually lower than inflation. There are different instruments, suitable for different time period, like a cycle is good for 5 Km but not for 5000 Km equally an aeroplane is suitable for 5000 Km but not 5 Km. So we may take certain calculative risk and manage the risk in a way so as to improve our overall returns.

We should diversify our investment but also avoid overdiversification, have moderate return expectations and automating the investment process through long-term SIPs.

5. Keep a Watch and Rebalance it

It is also equally important to rebalance the portfolio based on our own requirements and market conditions. This rebalance can be between asset classes or between categories. Most people increase allocation when the market is doing well and reduce in a bear market. By Automating asset rebalancing, we can remove the biases and make it more efficient.

6. Stick to it; don’t divert the funds

Some time we start using the money earmarked for goals for other needs. We can avoid it by segregation of investments for specific goals, by this we can be clear how we are doing to achieve these specific goals.  We can stop from dipping into investments prematurely by opting for investments that restrict liquidity. Long-term lock-ins help improves the power of compounding. As the power of compounding is back-ended and the maximum benefits come in later years.

For short term and immediate requirements, emergency fund is a better way so as to not to digup from long term investment portfolios. This fund should be invested in a liquid instrument so that it is readily available.

For example, assuming a return of 12% P.a., If someone investing Rs. 5000/- monthly for 5 years will get Rs. 4.12 lakhs at the end of the period while if he continues the monthly investment for 20 years his total corpus could be almost Rs. 50 lakhs which is 12 times than five years corpus while investment amount has gone up by four times only.

These are few simple behavioural tips which can be used to improve our overall savings without putting much pressure on our spending habits, if used properly can give visible change in total portfolio.

How to invest large sum when market is at all time high?

We all understand Systematic Investment Plan or SIPs as they are generally know as to invest regularly. But what should we do if we want to invest a large sum and not so sure about the market, for those investors STPs could be the right answer to so as to spread risk over a period of time. Let’s understand it in more details.

Most of us understand SIPs which is the best way to invest in mutual funds especially for those who earn regular income i.e. salary and want to save in a disciplined way. SIPs is a systematic way of investments which works by setting up a regular, fixed investment every month or even could be weekly or quarterly. It gets you a buying price that is averaged over many months or years, which eventually enhances returns. It also protects us from falling market to some extent as SIP ends up buying more units for the same amount of money in falling process. Most importantly, in SIP the monthly or regular installment fits the income pattern that most people have.

However, many times people have lum sum money or they get due to some reason like bonus etc which is not regular but wants to invest that money also but in a much better way. If this money is meant for the long-term ( five years and above) it could be invested in an equity fund all in one go also. However, that carries the risk also, if the markets tank 10-20% soon after the investment we may lose a big chunk of our money and to recover the loss could also be long term affair. In this kind of situation may people would get panicked and redeem the entire sum.

So what could be the solution? 

The solution is simple, but many people are not aware of it, It is called Systematic Transfer Plan or STP, which effectively provides the same potential for higher returns and lower risk as SIPs do, but for onetime investments. The STP is a regular transfer of money from one fund to another. It's like an SIP but the source of the money, instead of being from our Bank Account, is another mutual fund.

So how is it better than lum sum investment?

In STP, initially the money is invested in debt funds i.e. Liquid/Ultra short term funds which have lowest risk and stable returns, and non-volatile. For example. Let's say we got Rs.20 lakh which we would like to invest in an equity fund. This could be an asset sales or bonus from an employer etc.  If we are investing the entire sum at one go, we are exposing the entire investment to any sudden decline in equity markets. Therefore, what we should do is to choose the equity fund(s) and then, choose a liquid/ultra short-term debt fund from the same mutual fund company. First we should invest the entire sum in the debt fund, and then instruct the fund company to transfer say, Rs. 1 lakh into the chosen equity fund every month. In 20 or 21 instalments (not 20, as the debt fund will also add some returns), all the money would have shifted to the equity fund. The buying price would be the average of that time period, thus insulating us from market fluctuations.

However we should always remember that STPs, like SIPs, are not foolproof. If we look back at the markets over the last 10-15 years, we will understand that while an STP generally helps one avoid a market peak and average costs, they're not a foolproof device. In a situation like 2003-2008 when markets keep rising for many years, and then fall sharply, then even an STP cannot eliminate losses. As we all know equity is volatile asset class and there's no way of doing away all risks. However, based on what has happened over the last two decades in India, stretching an investment over one to three years is likely to capture enough of a market cycle to significantly reduce risk.

How should we decide the period for STP?

That should depend on how significant is the sum of money in our overall assets. For example, If the money is  proceeds of a property sale on which some major future plan depends, then three- four years would be appropriate. On the other hand, if it's a bonus worth a few months' income, then maybe six months to one year is enough. There's no fix rule on period and it depends on what we feel is the risk.

To conclude, like SIP, STP can also help us to average out the risk which is inbuilt in the equity market. AS we all know equity market does not works in a simple line, it has short term and long term volatility based on may internal (micro) as well as external (macro) reasons. We can use different strategies to average out the risk however at the end of the day, So be ready for surprises by the market also. 

DIWALI- “A Festival of Financial Enlightenment”

Diwali is a very old festival which is celebrated on the return of Lord Ram to Ayodhya after fourteen years of exile. Diwali is celebrated on a new-moon day and the lightening of lamps indicates the destruction of darkness and evil. For all Indians Diwali is one of the most popular Indian festivals which is celebrated with lot of pomp and splendour. “Lakshmi” The Goddess of Wealth is worshiped on this festival. It is an important occasion for many reasons like the importance of human bonding, celebrations in family, reunions of friends and relatives, etc.

This is an occasion not only for a traditional reason, but also for its significance to organise all the financial information. This tradition is equally significant for the business as well as many business starts new account books on this day, in Stock exchange also there is Muhurat Trading, a special occasion for the stock markets.

The Diwali festival also gives us a great learning about money which we have tried to discuss as below:

1. Dhanteras: Bringing home the “Dhan” –

The first day of Diwali, Dhanteras (“Dhan” meaning wealth and “Teras” meaning the “thirteenth day”) falls two days before Diwali. The day pays homage to Lord Dhanwantari who is associated with Ayurveda and various healing practices for the good of mankind. This day marks the day to make new purchases and investments and can also be referred as start of financial wellbeing. This day is considered to bring good luck and prosperity to the family. The popular belief is that any investment made on this day will grow and multiply throughout the year. It is the day chosen by most people to make investments in gold, silver, platinum or any other metal.  Regularly investing in precious metals, every year during this special day also helps you in growing and accumulating wealth over a long period. Off late, stepping aside from the traditional definition of investing in physical metal, it is seen that many investors also invest in gold ETFs, or financial instruments which is akin to investing in physical gold. The key learning is that we should keep on accumulating wealth regularly which will lead us to our financial wellness.

2. Narak Chaudas: To Clean up -  

The significance of this day is grounded in the story of Lord Krishna's overwhelming triumph over a ferocious demon named 'Narakasur', who kidnapped the 'gopis' This is the second day of Diwali wherein every one cleans up their home/work place and remove all the unnecessary things.

Similarly we should also check our portfolio thoroughly to ensure that it is aligned with our financial goals along with unforeseen/emergency expenses and also remove those investments which are no longer required. one of the key-learning’s on this occasion is to identify and eliminate the financial mistakes committed in the past be it availing high cost debt, wrong financial products purchase like endowment, ULIPs, etc.

3. Lakshmi Pujan: Respect the Money –

This is the day when Lord Rama finally returned home from exile and was welcomed with a glittering row of lights radiating from every household. It also coincides with the Pandavas' return from the forest. Lakshmi Puja is performed on this day. Lakshmi  is the Goddess of Wealth and her worship shows the respect of wealth and to preserve it in a pious way. This teaches us that we should do hard work with clean heart to earn so that goddess lakshmi will stay in our home forever. This day we also play with firecrackers and exchange sweets and presents which shows to celebrate happiness and share the joy of wealth with others. However we need to be careful and should not indulge into show offs which could be very dangerous.

4. Govardhan Puja or Padva: Anything can be achieved -

The fourth day is Govardhan Puja or Padva. It is the day when Lord Krishna defeated Indra by lifting the huge Govardhan Mountain. This gives us a learning that anything is possible if we believe in our self and put hard work. This is also New Year for many communities in India and symbolises a new start by overcoming past mistakes. We can start a new financial plan and make new commitments to ourselves so as to come out of our old perils and achieve new success in life.

5. Bhai Dooj : To share with our Loving Ones-

The fifth and last day is Bhai Dooj. On this day sisters invite their brothers for a lavish meal and perform a ‘tilak’ ceremony. Sisters pray for their brother’s long and happy life while the brothers give gifts to their sisters. This also teaches us to share the things with our loved ones like employers giving bonus/ESOPs to employees and employees promise to work hard to make their company more successful. Bhai dooj occasion teaches us that everyone has a role to play and if all of us do our duties with sincerity great success can be achieved easily.

Diwali is celebrated on a new-moon day and the lightening of lamps indicates the destruction of darkness and evil. Everybody aspires for a good time, and spending for the same is human. But one should never forget that celebrating a festival or an occasion should never be a onetime affair but should be done every year. Meaning although spending now can add to the celebration, it may adversely impact the saving potential thereby resulting in weak financial planning habits which in turn may compromise the financial goals in the future.

The best financial practice on this front is to allocate a budget for non-committed or discretionary expenses such as a festival, occasion or a celebration every month/year and comply by the budget. Strict adherence to the budget negates the possibility of overspending thereby enhancing surplus which in turn leads to a higher likelihood of celebrating these occasions regularly and not just one time.

Making Young Generation financially responsible

We all want in our heart that our children should become responsible adults, without facing any hardships due to their ill-thought out actions that results in regret and remorse. So how should we make them more sensible and literate about money and make them mature enough to handle it more sensibly. In this post we will discuss few important points which can be taken up during the teenager time of our children and help them to become a responsible person in future.

1. The kids grew in the family so the first lesson towards money is also learnt in the family environment. If we deliberate and discuss the merits of every financial decision with other family members, our kids will also pickup this habit. We should make them understand that money is a limited source and we should be avoiding impulsive buying or swiping credit cards carelessly. Be careful and clear why we are buying anything.  For kids we may fix a monthly allowance and stick with it to make them understand the meaning of budget and spending within their means.

2. As money is a limited source so we should also plan it properly. Making budget a joint affair with all family members will make them understand the value of money and the limitations we have towards spending it. During this exercise we will make them aware the priorities of various expenses and how should we allocate funds towards them. They will understand the importance and difference between various expenses i.e. food, basic amenities over discretionary/leisure items as costly electronic gadgets.

3. Let the kids also maintain their own income and expense records and we may check it once in a while. This will help them to review their past expenses and correct the unnecessary things on regular basis. Nowadays many online apps are available which can be very handy for this.

4. Encourage our kids to do some works (howsoever small or menial it is) if they need more money for buying luxury items so as to make them understand the importance of work and value of money.

5. Make them value others money also. Encourage them to pool money for joint expenses like eating out with friends so that everyone contributes and values others money. This will help them to take joint decisions in equitable manner which is good for everyone and does not becomes a burden for few.

6. We should guide them about few basics of banks and finances. Open their own bank accounts and let them learn basics of banking like doing banking transactions, using ATM/Debit cards or online transaction with proper safety. This will make them more confident and also make them understand how different system works.

These small habits will make them self-independent and help them to become a responsible person in future while they grow older and have their own families.

Mutual Fund + Term Insurance: Best of both Worlds

Investments comes for our help when we are there for long time and insurance rescues our family from financial crisis when the earning member is no more. Investment and Insurance both have their own importance but most of the time we get confused or confused by others and club both of them by this popular product called endowment plan - without realizing that these endowment plans give a return of 3% to 7% only. The best strategy that the layman investors could adopt is to take protection plan or what we most commonly call the Term Insurance cover and top this up with a Systematic Investment Plan (SIP) in an equity Mutual Fund Scheme.

A term insurance plan is an insurance cover taken by on the life of the person insured. In case of unfortunate death or disability or critical illness of the person insured, the beneficiary i.e. nominee shall receive the sum assured under the policy; however in case of survival the policyholder shall receive no return.

(A) Features of a Term insurance policy

1. This plan covers risk only: No return if nothing happens

2. Cheapest form of life insurance: The premium is as less as 10% as compared to traditional plans

3. Most suited for sole bread earners of the family: With less premium we get maximum coverage

4. Tax Benefits: It has same tax benefits under Section 80C of Income tax (max. limit 1.5 lakhs)

(B) Systematic Investment Plan of Mutual Funds

SIP or Systematic Investment Plan is a disciplined and a systematic way of investment in mutual fund schemes. Usually in India systematic investment in mutual funds is referred to as SIP. The investment can be made in any scheme i.e. equity, debt, gold or a blend of these. In SIP the money is directly debited from the investor’s bank account on a predefined day of each quarter/ month or week. The mutual fund scheme could be debt or equity oriented fund and can have tax saving equity linked saving schemes (ELSS). The below matrix suggest the various types of equity and debt oriented mutual funds, the risk return Matrix and their debt equity profiling.

For Example Let’s take LIC’s Most popular Plan New Jeevan Ananad:

For a thirty year old person the premium for 1 crore cover for 35 years tenure comes to Rs. 2,99, 434 annually or monthly premium of Rs. 25,516. For the same person if he takes LIc’s Amulya jeeva Policy (a Tem Insurance Prodcut) the Premium Comes to Rs. 32,096 annually or Rs. 2,675.

Suppose Mr. A takes Jeevan Anand and Mr. B takes Amulya Jeevan and invests remaining amount in Equity Mutual Funds. Let’s see the outcome:

Particular*	Mr. A takes : LIC's Jeevan Anand	Mr. B takes: Term Insurance + MF SIP
		LIC's Jeevan Amulya	Equity MF SIP
Monthly Premium	24,417.00	2,312.00
Service Tax	1,099.00	416.17
Total Monthly Premium	25,516.00	2,728.17	22,105.00
Timer Period	35 Years	35 years	35 Years
Death Benefit	1 Crore	1 Crore	NIL
Survival Benefit	Simple Annual Bonus + Final Bonus	NIL	Market Based Return
Assumed Bonus/ Return Rate (Annual)	6%		15%
Maturity Amount	2,45,27,244.00	NIL	15,30,39,096.00
*For A 30 Year old person and 35 years tenure

As we can see from the table above the maturity amount for Mr A comes to around Rs. 2.45 crores whereas Mr B who has taken combination of term insurance and mutual funds the total amount could be as much as Rs. 15.30 crores which is more than six times compared to Mr A who has taken Endowment Policy only. The difference in total return is really huge and makes a significant difference in the person’s wealth.

However, we should note that endowment plans are assured benefit products, in other words on maturity the insured will get the sum assured, plus the bonuses declared by the life insurance company every year. On the other hand, in the case of term plan + MF ELSS, maturity benefits are not assured, because there are no survival benefits in term plan and mutual funds are subject to market risks.

Further the 15% returns assumption for ELSS, is a critical element in financial case for term plan + ELSS versus an endowment plan. In the last 15 – 20 years, monthly SIP in top performing ELSS would have yielded more than 20% annualized returns, so this type of return can be expected in future.